News Column

CYANOTECH CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

June 27, 2014

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative of our financial condition, results of operations, liquidity and certain other factors that may affect our future results from the perspective of management.

Our MD&A should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K. A more comprehensive description of our products and markets for such products is provided in Part I. Item 1. Business.

Overview



We are a world leader in the production of natural products derived from microalgae, with a core competency in cultivating and processing microalgae into high-value, high-quality natural products for the human nutrition market. We produce our algae in Hawaii and manufacture the finished products in Hawaii and California. Our products are marketed worldwide and are sold in bulk quantities to manufacturers, formulators and distributors in the health foods and nutritional supplements markets and as packaged consumer products to distributors, retailers and direct consumers. We generated 37%, 37% and 33% of our revenues outside of the United States during the years ended March 31, 2014, 2013 and 2012, respectively. Competing in a global marketplace, we are influenced by the general economic conditions of the countries in which our customers operate, including adherence to our customers' local governmental regulations and requirements. Since all sales are made in U.S. currency, we have no material foreign exchange exposure.

--------------------------------------------------------------------------------

4 See: U.S. District Court for the Middle District of Florida, Case No. 5:12-cv-366, the public files for which are available at www.pacer.gov by referencing the Middle District of Florida and the specific Case No. 5:12 CV 366, although access is subject to government charges for such access.

5 See: the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office, the public files for which are available at https://ptabtrials.uspto.gov/ by entering "5527533" in the block for "Patent Number" and then clicking "Search."

15



--------------------------------------------------------------------------------

Our production levels have a significant impact on our gross profit margin, as well as our ability to meet customer demand. Because our processes are agricultural, it is important to maintain production volumes in order to support the minimal resource levels required to sustain a large-scale open culture agricultural facility. Our production costs include customary variables such as availability and costs of personnel, raw materials, energy, water and freight. These variables fluctuate based on changes in the local, national and world economies. More complex variables include cultivation methods, feeding formulations and harvesting processes, all of which include efforts to anticipate the extent of weather and environmental events and make timely and sufficient adjustments. Although the variability of such costs cannot be fully anticipated, we have focused increased effort in this area in order to produce both spirulina and astaxanthin at levels sufficient to fully absorb production costs into inventory.

Fresh water is critical for our natural astaxanthin production and, while we have not experienced any constraint on fresh water availability, future availability could be negatively impacted by significant growth in the local population as well as by throughput constraints on the water delivery infrastructure owned by the County of Hawaii. Given the criticality of fresh water to our operations and the community, we recycle fresh water where possible and have developed additional water recycling systems in our efforts to utilize fresh water efficiently. Both fresh and sea water require electricity for pumping; and electricity, our single largest expenditure, depends on the cost of fuel which is, in turn, tied to the global price of crude oil.

In our discussion of operating results, we refer to abnormal costs. Complex biological processes in the cultivation and processing of our microalgae are influenced by factors beyond our control-the weather, for example. As a result, we cannot assure that adequate production levels will be consistent period over period. To the extent that our production levels are not sufficient to absorb these costs on a period basis, we recognize abnormal production costs, including fixed cost variances from normal production capacity, as an expense in the period incurred. Abnormal amounts of freight, handling costs and wasted material (spoilage) are recognized as current-period charges and fixed production overhead costs are allocated to inventory based on the normal capacity of production facilities. Normal capacity is defined as "the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance."

To offset increased production costs, we seek ways to increase production efficiencies in volume yield, potency, and quality consistent with our commitment to produce high-value, high-quality products. However, these efforts cannot be guaranteed to achieve the desired results.

We utilize several third-party contractors for the process of extraction for our natural astaxanthin product for the human nutrition market, and several third-party contractors are utilized for both encapsulation (for gelcaps) and micro-encapsulation (for beadlets). Although these services are available from a limited number of sources, we believe that we have the ability to use other parties if any of the current contractors become unavailable. If pricing for any of these services significantly increases, there could be a material adverse effect on our business, financial condition and results of operations. There have not been any significant changes in the cost of extraction or encapsulation services, although we continue to investigate cost effective alternatives to outsourcing. On September 12, 2012, we entered into an agreement with ThyssenKrupp Industrial Solutions (USA), Inc. ("TKIS), formerly Uhde Corporation of America, for the purchase of supercritical carbon dioxide extraction equipment to be used in the processing of our natural astaxanthin. The equipment is expected to be delivered by the end of calendar year 2014.

Fiscal 2014 summary: ? Net sales for the year were $28.9 million, an increase of $1.3 million or 4.8% over the prior year, driven primarily by an increase in sales of our consumer products, offset by decreased sales of bulk products due to lower astaxanthin production in the third and fourth quarters of fiscal year 2014. ? Fiscal 2014 included pretax income of $47,000 and a net loss of $0.2 million, compared to pretax income of $2.2 million and net income of $4.2 million in fiscal 2013. The decrease in pretax income was driven by a 16.5% reduction in astaxanthin production that impacted sales and costs in the third and fourth quarter of the current fiscal year, as well as an increase in legal costs (see Item 3 - Legal Proceedings). The decrease in after-tax performance is the result of a $1.9 million tax benefit recognized in fiscal 2013 on the full reversal of the valuation allowance on our deferred tax asset. ? Cash from operating activities was $2.1 million, an increase of $0.3 million from the prior year, driven by decreased accounts receivable and an increase in accounts payable as a result of legal invoices received after the end of the year or not yet due, as well as the timing of inventory related purchases. These were offset by an increase in inventory of $1.1 million, of which approximately $0.4 million was the result of higher production costs. Cash and cash equivalents at March 31, 2014 decreased slightly compared to last year. Working capital decreased 4% to $8.9 million at March 31, 2014 from $9.3 million a year ago, mainly due to increased accounts payable. 16



--------------------------------------------------------------------------------

Results of Operations for the 2014, 2013 and 2012 Fiscal Years

The following tables present selected consolidated financial data for each of the past three fiscal years ($ in thousands):

Consolidated Performance Summary 2014 2013 2012 Net sales

$ 28,905$ 27,581$ 24,631 Net sales increase 4.8 % 12.0 % 46.4 % Gross profit $ 11,564$ 10,958$ 9,774 Gross profit as % of net sales 40.0 % 39.7 % 39.7 % SG&A $ 11,399$ 8,659$ 6,871 SG&A as % of net sales 39.4 % 31.4 % 27.9 % Operating income $ 165$ 2,299$ 2,903 Operating income as % of net sales 0.6 % 8.3 % 11.8 % Income tax (expense) benefit $ (242 )$ 2,021$ 779 Net (loss) income $ (195 )$ 4,209$ 3,632 Net sales by product 2014 2013 2012 Bulk sales Spirulina bulk $ 3,517$ 3,605$ 5,002 Spirulina bulk sales (decrease) (2.4 )% (27.3 )% (8.5 )% Astaxanthin bulk $ 7,466$ 11,604$ 11,121



Astaxanthin bulk sales (decrease) increase (35.7 )% 4.3 % 99.7 % Total Bulk sales

$ 10,983$ 15,209$ 16,123 Total Bulk sales (decrease) increase (27.8 )% (5.7 )% 46.1 % Packaged sales Spirulina packaged $ 5,790$ 5,263$ 3,717 Spirulina packaged sales increase 10.0 % 41.6 % 26.9 % Astaxanthin packaged $ 12,132$ 7,109$ 4,791 Astaxanthin packaged sales increase 70.7 % 48.4 % 68.1 % Total Packaged sales $ 17,922$ 12,372$ 8,508 Total Packaged sales increase 44.9 % 45.4 % 47.2 %



Fiscal 2014 results compared with Fiscal 2013

Net Sales The net sales growth of 4.8% in fiscal 2014 was driven largely by increased demand for BioAstin®, fueled by continued marketing efforts to expand consumer awareness on the health benefits of astaxanthin. Our astaxanthin sales increased 4.7% over the prior year, driven by a 70.7% increase in packaged sales, offset by a 35.7% decrease in bulk sales. This reduction in bulk sales was the result of lower astaxanthin production in the third and fourth quarter and higher demand for packaged products. Our spirulina products also received the benefit of positive marketing efforts on its health benefits and experienced 4.9% growth, driven by a 10% increase in packaged sales and a 2.4% reduction in bulk sales. Both products are sold in bulk form for use worldwide and in consumer packaged goods distributed primarily in the U.S. We will continue to focus on growing the market for our high quality, higher margin consumer products by emphasizing the higher nutritional content of our Hawaiian spirulina and the benefits of our natural astaxanthin over synthetics; however, increased competition may result in the decline of margins in the future.

Competition for sales of spirulina remains intense due to the large number of suppliers. We expect competitive pricing pressure to continue in future periods and will continue to focus on the higher quality of Hawaiian spirulina in support of customers who demand higher quality raw materials for their formulations. Conversely, because of the limited number of suppliers and increasing demand for astaxanthin, the competitive forces are currently not quite as high. Because of this, we expect current producers to increase capacity to meet this increasing demand, placing further competitive pressures on us in the future.

Gross Profit Our gross profit percent of net sales was 0.3% higher than the prior year. In fiscal 2014, decreased astaxanthin production volume impacted gross profit unfavorably by $1.7 million, including abnormal costs of $0.4 million. Comparatively, fiscal 2013 year gross profit was unfavorably impacted by abnormal costs of $1.2 million due to lower spirulina production. A 44.9% increase in sales of our higher margin consumer products was offset by a 27.8% decrease in bulk sales in the current fiscal year.

17



--------------------------------------------------------------------------------

In fiscal 2014, astaxanthin production levels decreased by 16.5% from the prior year and spirulina production levels increased by 40.0% over the prior year. The decrease in astaxanthin production levels was the result of environmental factors that affected the quantity, but not the quality, of our astaxanthin produced during the third and fourth quarters of fiscal 2014. We have implemented three major initiatives to improve Astaxanthin production. The first is a strain productivity improvement program. In limited full-scale production, productivity has increased +63% and +11% in the two versions tested. The second is focused on increasing the density of algae, which in initial full-scale production is generating 6% more output. The third is a process change which has the potential to reduce the space necessary to produce astaxanthin, protect algae from the elements for a greater portion of the farming process and increase the frequency and volume of output in the early stages of production. We believe these initiatives will increase the level and consistency of production in the near future. The increase in spirulina production levels was driven by recently implemented process changes and additional process equipment for culture media which should help ensure more sustainable production over the long term.

Operating Expenses Operating expenses increased by $2,740,000, or 32%, in 2014 and increased as a percentage of net sales by 8%. General and Administrative expenses increased $1,735,000, or 37%, due to an increase in legal fees of $1,100,000 (see Item 3 - Legal Proceedings), increases in costs associated with stock option grants to key employees of $64,000 and an increase in compensation costs related to salaries and benefits for new hires and transfers of $340,000. Approximately 66% of the increase in legal fees impacted the fourth quarter. Sales and Marketing expenses increased $794,000, or 22%, as a result of the expansion of our distribution of consumer products. Major components of these costs are a $556,000 increase in advertising and promotion a $166,000 increase in compensation costs related to salary adjustments, benefits and new hires. Research and development expenses increased $211,000, or 82%, due to an $83,000 increase in outside services utilized to increase the production of astaxanthin, a $63,000 increase in compensation costs related to salaries and benefits for new hires and a $69,000 increase in clinical trial expense.

Other Expense Other expense is comprised primarily of interest expense on term loans, amortization of debt issue costs and interest on other financing agreements, offset by a nominal amount of interest earned and miscellaneous sales. The increase of $7,000 in 2014 is primarily due to the new debt acquired in August of 2012.

Income Taxes For fiscal 2014 we recorded an income tax expense of $242,000 compared with an income tax benefit of $2,021,000 for 2013. The 2013 tax benefit was the result of a reduction in the deferred tax valuation allowance and recording of a net deferred tax asset. Our effective tax rate for the year ended March 31, 2014 was 512.7% due to the low pretax income and permanent book to tax difference related to stock option compensation. Our effective tax rate was (92.4%) for the fiscal year ended March 31, 2013. As of March 31, 2014 and 2013, there is no valuation allowance on our net deferred tax asset, which now totals $3,340,000, compared to a $3,539,000 at the end of last year. At March 31, 2014 we had a Federal net operating loss carry forward of $10,908,000 and a state net operating loss of $6,020,000 for Hawaii.

Fiscal 2013 results compared with Fiscal 2012

Net Sales The net sales growth of 12% in fiscal 2013 was driven largely by increased demand for BioAstin®, fueled by continued media attention on the health benefits of astaxanthin. Our astaxanthin sales increased 17.6% over the prior year. Our spirulina products also received the benefit of positive media on its health benefits and experienced 1.9% growth. Both products are sold in bulk form for use worldwide and in consumer packaged goods distributed primarily in the U.S. We cannot predict the impact of this publicity on future period sales. We will continue to focus on growing the market for our high quality, higher margin consumer products by emphasizing the higher nutritional content of our Hawaiian spirulina and the benefits of our natural astaxanthin over synthetics; however, increased competition may result in the decline of margins in the future

Competition for sales of spirulina remains intense due to the large number of suppliers. We expect competitive pricing pressure to continue in future periods and will continue to focus on the higher quality of Hawaiian spirulina in support of customers who demand higher quality raw materials for their formulations. Conversely, because of the limited number of suppliers and increasing demand for astaxanthin, the competitive forces are currently not quite as high. Because of this, we expect current producers to increase capacity to meet this increasing demand, placing further competitive pressures on us in the future.

Gross Profit Our gross profit percent of net sales remained the same as in fiscal 2012. A 45.4% increase in sales of our higher margin consumer products was offset by a 5.7% decrease in bulk sales. This favorable mix impact was offset by abnormal production costs of $1.2 million that resulted from fixed cost variances from normal production capacity due primarily to lower levels of spirulina production.

In fiscal 2013, astaxanthin production levels increased by 6.7% over the prior year and spirulina production levels decreased by 13.1%. The increase in astaxanthin production levels was the result of capacity expansion and improvements to our production processes as well as generally favorable growing conditions through the third quarter of fiscal 2013. The decrease in spirulina production levels was driven by a morphological change in the size of the algae that inhibited successful harvests. We recently implemented process changes and ordered additional process equipment for culture media which should gradually increase production levels and help ensure more sustainable production over the long term.

18



--------------------------------------------------------------------------------

Operating Expenses Operating expenses increased by $1,788,000, or 25%, in 2013 and increased as a percentage of net sales by 3.5%. General and Administrative expenses increased $666,000, or 17%, due to an increase in legal fees of $520,000, increases in costs associated with stock option grants to key employees of $233,000 and an increase in compensation costs related to salaries and benefits for new hires and transfers of $195,000, offset by a reduction in bonus expense of $376,000. Sales and Marketing expenses increased $1,195,000, or 48%, as a result of the expansion of our distribution of consumer products. Major components of these costs are an $811,000 increase in advertising and promotion a $195,000 increase in compensation costs related to salary adjustments, benefits and new hires. Research and development expenses decreased $62,000, or 19%, due to a $32,000 reduction in bonus expense as well as reductions in general operating costs.

Other Expense Other expense is comprised primarily of interest expense on term loans, amortization of debt issue costs and interest on other financing agreements, offset by a nominal amount of interest earned and miscellaneous sales. The increase of $61,000 in 2013 is primarily due to the write off of unamortized debt issue costs related to early payoff of the previous Term Loan.

Income Taxes For fiscal 2013 we recorded an income tax benefit of $2,021,000 compared with an income tax benefit of $779,000 for 2012. The 2013 and 2012 tax benefits are the result of a reduction in the deferred tax valuation allowance and recording of a net deferred tax asset. As a result, our effective tax rate was (92.4)% and (27.3)% for the fiscal years ended March 31, 2013 and 2012, respectively. As of March 31, 2013, there is no valuation allowance on our deferred tax asset, which now totals $3,539,000, compared to a $2,994,000 valuation allowance on gross deferred tax assets of $4,437,000 at the end of last year. At March 31, 2013 we had a Federal net operating loss carry forward of $9,976,000 and a state net operating loss of $6,070,000 for Hawaii.

Liquidity and Capital Resources

Sources of Liquidity As of March 31, 2014, we had $8,898,000 in working capital, compared to $9,306,000 at March 31, 2013. Additionally, at March 31, 2014 and 2013, we had $1,368,000 and $3,360,000, respectively, in restricted cash that will be used to acquire new processing equipment and leasehold improvements. Funds generated by operating activities and available cash and cash equivalents continue to be our most significant sources of liquidity for working capital requirements and for funding of investments in equipment, leasehold improvements and system upgrades. Based upon our current operating plan, analysis of our consolidated financial position and projected future results of operations, we believe that our operating cash flows and existing cash balances will be sufficient to finance current operating requirements and meet debt service and planned capital expenditures, for the next 12 months. We use estimates of future financial results including projected revenue, fund expenses, borrowings, and capital expenditures in reaching our conclusions. Such estimates are subject to change based on future results and such change could cause future results to vary significantly from expected results presented in this Form 10-K. Any significant investments in capital equipment related to capacity expansion may not be able to be funded from operating activities and available cash, and may require additional debt or equity funding.

Our results of operations and financial condition can be affected by numerous factors, many of which are beyond our control and could cause future results of operations to fluctuate materially as it has in the past. Future operating results may fluctuate as a result of changes in sales volumes to our largest customers, weather patterns, increased competition, increased materials, nutrient and energy costs, government regulations and other factors beyond our control.

A significant portion of our expense levels are relatively fixed, so the timing of increases in expenses is based in large part on forecasts of future sales. If net sales are below expectations in any given period, the adverse impact on results of operations may be magnified by our inability to adjust spending quickly enough to compensate for the sales shortfall. We may also choose to reduce prices or increase spending in response to market conditions, which may have a material adverse effect on financial condition and results of operations.

19



--------------------------------------------------------------------------------

Contractual Obligations The following table presents our contractual obligations at March 31, 2014 (in thousands): Less Than 2-3 4-5 After 5 1 Year Years Years Years Total Term Loans(1) $ 204$ 401$ 421$ 4,441$ 5,467 Interest payments(2) 294 556 512 1,841 3,203 Operating Leases(3) 499 838 804 5,126 7,267 Purchase obligations(4) 790 - - - 790 Total $ 1,787$ 1,795$ 1,737$ 11,408$ 16,727



--------------------------------------------------------------------------------

Note: For additional information refer to Note 5, Long-Term Debt and Note 6, Leases in the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

(1) Includes term loans with a current balance of $5,414,000, secured by substantially all of the assets of the Company. Also includes four equipment loans and an auto loan with a combined current balance of $53,000. (2) Interest calculated from loan amortization using current rates. (3) Operating lease obligations do not include percentage rent, property taxes and payments for common area maintenance. (4) Purchase obligations include agreements to purchase goods or services that are enforceable, are legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations do not include agreements that are cancelable without penalty.



Cash Flows The following table summarizes our cash flows from operating, investing and financing activities for each of the past three fiscal years ($ in thousands):

2014 2013 2012 Total cash is provided by (used in): Operating activities $ 2,149$ 1,897$ 5,082 Investing activities (2,125 ) (7,254 ) (2,029 ) Financing activities (76 ) 4,660 (54 )



Increase (decrease) in cash and cash equivalents $ (52 )$ (697 )$ 2,999

The increase in cash provided by operating activities of $252,000 from the prior year was driven by a $1,332,000 increase in payables due to inventory building and invoices for legal costs received after the end of the year, as well as a $419,000 decrease in accounts receivable due to collections. Offsetting these is an increase in inventory of $1,185,000 and prepaid expenses of $249,000. The decrease in cash provided by operating activities in fiscal 2013 compared to fiscal 2012 was driven largely by the increase in accounts receivable of $1,382,000 due to sales growth, compared to a reduction of $304,000 in fiscal 2012, and the payment of $613,000 in bonuses that were accrued as of the end of fiscal 2012.

Cash used in investing activities decreased in fiscal 2014 compared to fiscal 2013 due to the release of restricted cash used to fund the investment in equipment and leasehold improvements to increase astaxanthin production capacity. Cash used in investing activities increased in fiscal 2013 compared to fiscal 2012 due to the investment in equipment and leasehold improvements to increase astaxanthin production capacity as well as the construction of a new office facility at the Kona headquarters.

Cash used in financing activities during fiscal 2014 consist mainly of the servicing of debt acquired during fiscal 2013. Cash provided by financing activities increased in fiscal 2013 from 2012 due to the receipt of proceeds from new term loans.

Effect of Recently Issued Accounting Standards and Estimates

We do not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on our consolidated financial position, results of operations, or cash flows.

20



--------------------------------------------------------------------------------

Application of Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with those accounting principles requires management to make judgments and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Management regularly re-evaluates its judgments and estimates which are based upon historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Management believes that of its significant accounting policies, policies that may involve a higher degree of judgment and complexity are inventory valuations, valuation of equipment and leasehold improvements and long-lived assets, and income taxes.

Revenue - We recognize revenues as goods are shipped to customers and title is transferred. The criteria for recognition of revenue are when persuasive evidence that an arrangement exists and both title and risk of loss have passed to the customer, the price is fixed or determinable, and collectability is reasonably assured. Sales returns and allowances are estimated and recorded as a reduction to sales in the period in which sales are recorded. We record net shipping charges and sales tax in cost of goods sold.

Inventory - We record inventories at the lower of cost or market. Cost is defined as the sum of the applicable expenditures and charges directly or indirectly incurred in bringing inventories to their existing condition and location. Cost for inventory purposes may be determined under any one of several assumptions as to the flow of cost factors, such as first-in, first-out; average cost; and last-in, first-out. Our inventories are stated using the first-in, first-out method. Inventory values are subject to many critical estimates, including production levels and capacity, changes in the prices paid for raw materials, supplies, and labor, changes in yield, potency, and quality of biomass, changes in processing or production methods, and changes in the carrying value of our inventories resulting from the prices our customers are willing to pay for our products. Such estimates are revised quarterly. Changes in management's estimates could result in increases or decreases in the recorded amounts of inventory and cost of sales.

To the extent that our production levels are not sufficient to absorb all production costs on a period basis, we recognize abnormal production costs, including fixed cost variances from normal production capacity, as an expense in the period incurred. Abnormal amounts of freight, handling costs and wasted material (spoilage) are recognized as current-period charges and fixed production overhead costs are allocated to inventory based on the normal capacity of production facilities. Normal capacity is defined as "the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance." Changes in management's estimates could result in increases or decreases in the recorded amounts of inventory and cost of sales.

Management reviews inventory levels, inventory turnover, product age and product marketability quarterly to evaluate recoverability and determine if a reserve for inventory is deemed necessary. At March 31, 2014 an inventory reserve in the amount of $6,000 has been recognized, compared to $9,000 as of March 31, 2013.

Equipment and leasehold improvements - Equipment and leasehold improvements are reported at cost less accumulated depreciation and amortization. Self-constructed leasehold improvements include design, construction and supervision costs. These costs are recorded in construction in progress and are transferred to equipment and leasehold improvements when construction is completed and the facilities are placed in service. Long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized to the extent that the carrying amount exceeds the asset's fair value. We have not recognized any impairment of long lived assets as of March 31, 2014 or 2013.

Stock-Based Compensation - We provide compensation benefits in the form of stock options to employees and non-employee directors. Our stock options are service based, and the cost of stock-based compensation is recorded at fair value at the date of grant and expensed in the consolidated statement of operations over the service period. The fair value of service-based stock option awards is estimated on the date of grant using the Black-Scholes option pricing model and is recognized in expense over the vesting period of the options using the straight-line method. The Black-Scholes option pricing model requires various assumptions, including the expected volatility of our stock, the expected term of the option, the risk-free interest rate and the expected dividend yield. Expected volatility is based on historical volatility of our common stock. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. We recognize compensation expense for only that portion of stock based awards that are expected to vest. We utilize historical employee termination behavior to determine our estimated forfeiture rates. If the actual forfeitures differ from those estimated by management, adjustments to compensation expense will be made in future periods. See Note 8 in the Notes to our consolidated financial statements included in this 10-K.

21



--------------------------------------------------------------------------------

Income taxes - Income taxes are accounted for under the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be recovered or settled. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters